Secured Lending in Iraq

Secured Lending in Iraq Secured lending where the borrower provides collateral to the lender as security for repayment is fundamental to credit markets in Iraq. However, the Iraqi legal framework for taking, registering, and enforcing security presents significant practical challenges that lenders must understand before extending secured credit. The absence of a comprehensive, modern personal property security law, combined with court-dependent enforcement procedures, means that taking security in Iraq requires careful legal structuring from the outset. This article provides a comprehensive guide to secured lending in Iraq, examining each major category of collateral and the applicable legal framework. The Iraqi Legal Framework for Security Security interests in Iraq are primarily governed by the Iraqi Civil Code (Law No. 40 of 1951), which contains detailed provisions on mortgage (rahn) over real property in Articles 1287 to 1391, and pledge (rahn hiyazi) over movable assets. The Commercial Law No. 30 of 1984 contains supplementary provisions relevant to commercial security arrangements. There is currently no unified modern personal property security law in Iraq equivalent to Article 9 of the US Uniform Commercial Code or equivalent regimes in other jurisdictions, a gap that creates complexity for lenders seeking to take security over movable assets, receivables, and intangible property. Reform of the secured transactions framework has been under consideration, and lenders should monitor legislative developments. Mortgage Over Real Property Mortgage over real property is the most commonly used and most reliably enforceable form of security in Iraq. To be valid and enforceable against third parties, a mortgage over Iraqi real property must be: executed before a notary public; registered with the Real Estate Registration Directorate in the governorate where the property is located; and entered in the real property register. The mortgage grants the mortgagee priority over other creditors with respect to the mortgaged property. Enforcement of a real property mortgage requires a court order the lender cannot enforce by private sale without judicial involvement. The court-supervised enforcement process, while potentially time-consuming, provides a legally robust mechanism for realising security over real estate. Pledge Over Movable Assets Pledge over movable assets (rahn hiyazi) under the Iraqi Civil Code requires, in its traditional form, delivery of possession of the pledged asset to the pledgee or a third-party custodian. This possessory requirement creates obvious practical difficulties for operating businesses that need to continue using their assets. Non-possessory security over movable assets essential for financing inventory, equipment, and machinery is not clearly provided for under the existing legal framework, creating uncertainty about the validity and priority of such arrangements. In practice, lenders taking security over movable assets in Iraq typically combine formal pledge arrangements with contractual restrictions on disposal, and ensure that the security is acknowledged in the loan documentation. Pledge Over Shares Security over shares of Iraqi companies is an important form of collateral, particularly in acquisition finance and holding company structures. Under the Iraqi Companies Law No. 21 of 1997, shares in limited liability companies (sharikat mahduda al-masouliya) can be pledged as security. The pledge must be documented and for limited liability companies registered in the company’s share register and notified to the Companies Registry Directorate. Enforcement of a share pledge in Iraq requires careful legal analysis: transfer of shares may require approval from the Companies Registry, and in some regulated sectors, prior regulatory approval is required. Assignment of Receivables and Contract Rights Assignment of receivables the transfer of the borrower’s rights to receive payments from third parties as security is an increasingly used form of collateral in Iraqi project finance and infrastructure transactions. The Iraqi Civil Code permits assignment of rights under Articles 347 to 358, subject to notification to the debtor. For effective security over receivables, the assignment must be documented clearly, the assigned contracts must be identified, and the relevant debtors (e.g. government offtakers or project counterparties) must be notified of the assignment. In transactions involving Iraqi government counterparties, the assignability of government contracts should be specifically verified. CBI Requirements for Collateral The CBI’s lending instructions impose specific requirements on Iraqi banks regarding collateral. Banks must use CBI-approved collateral valuation methodologies and must have collateral independently valued by qualified professionals. The CBI specifies the loan-to-value ratios applicable to different categories of collateral for example, the percentage of a property’s value that may be advanced against a mortgage. Banks must also conduct periodic revaluations of collateral and increase provisions if collateral values decline below required coverage ratios. Under Basel III as implemented by the CBI, the recognition of collateral for capital relief purposes is subject to specific eligibility criteria and operational requirements. Enforcement — Practical Considerations Enforcement of security in Iraq requires navigating the Iraqi court system. Key practical considerations include: all enforcement of security over real property requires a court order from the competent court in the governorate where the property is located; the enforcement process involves valuation of the secured asset, public auction, and distribution of proceeds; the timeline for enforcement through Iraqi courts depends on whether the debtor contests the process and the workload of the relevant court; lenders should ensure their loan documentation includes express enforcement rights and waivers of notice to the extent permitted under Iraqi law; and lenders should obtain an Iraqi law legal opinion on the validity, perfection, and enforceability of security before relying on it for credit approval. How Etihad Law Firm Assists Etihad advises lenders on structuring and documenting security packages in Iraqi transactions, prepares and reviews mortgage and pledge documentation, advises on registration requirements and procedures, obtains Iraqi law legal opinions on security validity and enforceability, and represents lenders in security enforcement proceedings before Iraqi courts.

Events of Default in Iraqi Loan Agreements

Events of Default in Iraqi Loan Agreements The events of default clause is arguably the most consequential provision in any loan agreement and in Iraqi transactions, its importance is amplified by the intersection of Iraqi civil law remedies, CBI supervisory requirements, and the practical challenges of enforcement in the Iraqi legal system. When a default is declared, a lender’s ability to protect its position depends entirely on how well the default triggers were drafted, whether security was properly registered, and how swiftly the lender moves. This article examines the full landscape of events of default in Iraqi loan agreements, from the legal framework to practical enforcement considerations. The Iraqi Civil Code Framework on Default The Iraqi Civil Code provides the foundational legal framework for default in loan transactions. Under Article 177, a creditor is entitled to demand performance of contractual obligations, and upon a debtor’s failure to perform, Article 178 entitles the creditor to seek judicial termination of the contract and compensation for loss. Article 180 addresses anticipatory breach where it becomes clear before the due date that the debtor will not perform. These civil code provisions form the backstop for contractually defined events of default, but parties in commercial lending transactions invariably supplement them with detailed contractual default provisions that provide clearer and faster remedies than judicial action alone. Common Events of Default in Iraqi Loan Agreements Standard events of default in Iraqi loan agreements include: non-payment failure to pay principal, interest, fees, or any other amount due under the loan agreement on the due date, typically with a grace period of three to five business days; financial covenant breach failure to maintain agreed financial ratios, subject to any cure period negotiated; misrepresentation any representation or warranty proves to have been incorrect when made or deemed repeated; cross-default, default under any other financial indebtedness of the borrower above a threshold amount; insolvency, the borrower becomes insolvent, is unable to pay its debts as they fall due, or is subject to liquidation or bankruptcy proceedings; cessation of business, the borrower suspends or threatens to cease its business operations; expropriation or nationalization, government seizure of the borrower’s material assets; and material adverse change a material adverse change in the borrower’s financial condition, business, or ability to perform its obligations. CBI Requirements and Default Provisions The CBI’s lending instructions require Iraqi banks to include specific default triggers in their loan agreements, reflecting prudential supervision requirements. CBI-mandated default triggers include: failure to maintain required insurance over secured assets; failure to provide financial statements and compliance certificates within required timeframes; any change in the legal status or ownership structure of the borrower without prior bank notification; loss or suspension of any material licence or permit required for the borrower’s business; and commencement of any legal proceedings against the borrower that could materially affect its ability to repay the loan. Banks must also classify loans as non-performing within specified periods following a payment default typically 90 days and report non-performing exposures to the CBI accordingly. Cross-Default in Iraqi Transactions Cross-default clauses present particular complexity in Iraqi transactions. A cross-default provision provides that a default under any other financial indebtedness of the borrower whether owed to the lending bank, another Iraqi bank, or an international creditor constitutes a default under the current loan agreement. In Iraqi practice, cross-default provisions should be carefully calibrated: the threshold amount triggering cross-default must reflect the borrower’s size and debt profile; borrowers should seek cross-acceleration rather than cross-default meaning the cross-default is triggered only when another creditor has actually accelerated its facility, not merely when a technical default has occurred; and existing indebtedness should be scheduled and carved out to avoid triggering default on day one. The Material Adverse Change Clause in Iraqi Context Material adverse change (MAC) clauses are particularly contentious in Iraqi transactions given the country’s dynamic political and economic environment. A broadly drafted MAC clause could theoretically be triggered by currency devaluation, oil price movements, or political developments events that are foreseeable risks rather than unexpected deterioration. Borrowers in Iraqi transactions should negotiate MAC definitions that exclude: general economic, political, or market conditions in Iraq or globally; changes in oil prices or government budget allocations; changes in applicable law or regulation that affect the sector generally; and any matter disclosed to the lender prior to the agreement date. Iraqi courts have limited jurisprudence on MAC clauses specifically, making careful drafting even more important. Consequences of Default and Enforcement in Iraq Upon the occurrence of an event of default, a lender under an Iraqi law-governed loan agreement may: issue a notice of acceleration demanding immediate repayment of all outstanding amounts; enforce security over the borrower’s assets in accordance with Iraqi law security enforcement procedures; apply to the Iraqi courts for a judgment debt; and in the case of a licensed bank, report the default to the CBI as part of non-performing loan reporting obligations. Enforcement of security in Iraq requires navigating the Iraqi court system, which can be time-consuming. Real property security enforcement requires a court order. Movable property security enforcement procedures depend on the type of security and the applicable registration system. International arbitration awards against Iraqi entities must be enforced through the Iraqi courts under the New York Convention, to which Iraq acceded in 2008. Grace Periods and Waiver Considerations Grace periods are a critical negotiating point for borrowers. Standard grace periods in Iraqi loan agreements include three to five business days for payment defaults, 30 days for covenant breaches capable of remedy, and immediate effect for insolvency-related defaults. Lenders should be aware that granting waivers of defaults without careful documentation can create arguments that the lender has waived its rights more broadly. Any waiver should be in writing, clearly specify the default being waived, state that it is a one-time waiver only, and reserve all other rights. How Etihad Law Firm Assists Etihad advises lenders on drafting robust default provisions in Iraqi loan agreements, advises borrowers on negotiating appropriate grace periods and cure rights, advises

Loan Covenants in Iraqi Transactions

What Banks and Borrowers Must Know? Loan covenants define the ongoing obligations a borrower must satisfy throughout the life of a credit facility. In Iraqi transactions, covenants operate at the intersection of Iraqi civil and commercial law, CBI regulatory requirements, and where international lenders are involved internationally recognised documentation standards developed by bodies such as the Loan Market Association (LMA). Getting covenants right is critical: covenants that are too tight will lead to technical defaults; covenants that are too loose will fail to provide lenders with adequate early warning. This article examines how loan covenants work in Iraqi transactions and what both lenders and borrowers need to know. The Legal Basis for Covenants Under Iraqi Law Under the Iraqi Civil Code, loan agreements are binding contracts governed by general principles of contract law. Covenants whether financial, positive, or negative constitute contractual obligations of the borrower. Breach of a covenant that constitutes a material term of the loan agreement entitles the lender to treat the agreement as terminated and demand immediate repayment, in accordance with Articles 177 and 178 of the Iraqi Civil Code on breach and termination. The Iraqi Civil Code also recognises the principle of good faith in contract performance a principle that can be relevant when assessing whether a lender’s exercise of covenant enforcement rights is proportionate and commercially reasonable. Financial Covenants in Iraqi Lending Practice Financial covenants are periodic tests of the borrower’s financial health. In international lending, they are typically measured against audited or management accounts. In Iraqi transactions, the following financial covenants are commonly used: leverage ratio total debt to EBITDA, typically tested semi-annually against the borrower’s financial statements; debt service coverage ratio cash flow available for debt service divided by total debt service payments, critical in project finance transactions; minimum net worth requiring the borrower to maintain a minimum level of shareholders’ equity; and maximum capital expenditure limiting investment spending to protect liquidity. A key practical issue in Iraqi transactions is the quality and timeliness of financial reporting. CBI requirements mandate that licensed banks produce financial statements in accordance with IFRS, but non-bank corporate borrowers in Iraq may not produce IFRS-compliant accounts, creating challenges in defining and testing financial covenants. Positive Covenants — Iraqi Regulatory Requirements Positive covenants in Iraqi loan agreements typically include: an obligation to maintain all licences, permits, and authorisations required to carry on business in Iraq including licences issued by the Companies Registry, sector-specific regulators, and the CBI where applicable; an obligation to comply with all applicable Iraqi laws and regulations, including the AML Law No. 39 of 2015 and CBI instructions; an obligation to provide the lender with annual audited financial statements, quarterly management accounts, and immediate notification of any event of default or potential default; and an obligation to maintain insurance over charged assets at levels acceptable to the lender. Negative Covenants — Key Restrictions in Iraqi Transactions Negative covenants restrict the borrower from taking certain actions without lender consent. Standard negative covenants in Iraqi loan agreements include: a prohibition on incurring additional financial indebtedness above agreed thresholds; a negative pledge restricting the creation of security over the borrower’s assets in favour of other creditors; restrictions on disposal of material assets including real property registered in Iraq; restrictions on changes to the borrower’s corporate structure including mergers, demergers, and changes in the composition of the board of directors; and restrictions on distributions to shareholders where financial covenants are not met. In Iraqi practice, lenders must pay particular attention to Companies Law No. 21 of 1997 restrictions on distributions and capital reductions, which may interact with loan covenant restrictions. CBI Requirements Relevant to Covenants CBI lending instructions impose their own requirements that effectively function as regulatory covenants. Banks must include in their loan agreements: provisions requiring borrowers to maintain their primary banking relationship with the lending bank; provisions requiring notification of any material adverse change in the borrower’s business or financial position; provisions allowing the bank to conduct periodic reviews of the borrower’s financial condition; and provisions allowing the bank to demand additional collateral if the value of existing security falls below agreed thresholds. These CBI-mandated provisions must be incorporated into loan documentation alongside any commercially negotiated covenants. International Standards — LMA Covenant Approach Where international lenders participate in Iraqi transactions whether as lead arrangers, participants in syndicated facilities, or bilateral lenders LMA documentation standards are typically applied. LMA covenant provisions are detailed and highly negotiated. Key features of the LMA approach relevant to Iraqi transactions include: the distinction between maintenance covenants (tested periodically) and incurrence covenants (tested only when the borrower takes a specific action); equity cure rights allowing shareholders to remedy a financial covenant breach by injecting equity; and EBITDA definitions that must be adapted to reflect Iraqi accounting practices and the absence of standardised IFRS reporting among Iraqi corporates. Negotiating Covenants in Iraqi Transactions Borrowers in Iraqi transactions should focus on the following when negotiating covenants: ensuring financial covenant levels include adequate headroom above projected performance typically 20-30% cushion; negotiating cure periods of at least 30 days for covenant breaches before an event of default is triggered; seeking equity cure rights for financial covenant breaches; obtaining carve-outs from negative covenants for ordinary course transactions and existing indebtedness; and ensuring that financial covenant definitions align with the borrower’s actual accounting practices under Iraqi GAAP or IFRS as applicable. How Etihad Law Firm Assists Etihad advises corporate borrowers and lenders on the negotiation and drafting of loan covenants in Iraqi transactions, reviewing proposed covenant packages against CBI requirements and international standards, advising on covenant breaches and waiver negotiations, and representing clients in disputes arising from alleged covenant violations. We have particular experience in bridging Iraqi law requirements with international lender expectations.

What Banks and Borrowers Must Know?

Lending Regulations in Iraq: What Banks and Borrowers Must Know Lending in Iraq sits at the intersection of domestic banking law, Central Bank of Iraq (CBI) regulatory instructions, and internationally recognised prudential standards. Whether you are an Iraqi bank extending credit, a corporate borrower seeking financing, or a foreign institution considering participation in Iraqi lending markets, understanding this framework is not optional, it is the foundation of every credit decision. This article examines the full regulatory landscape governing lending in Iraq, from the primary legislative framework to international standards that Iraqi banks are increasingly expected to meet. The Primary Legislative Framework Lending in Iraq is principally governed by the Banking Law No. 94 of 2004, which establishes the legal foundation for the licensing, operation, and supervision of banks in Iraq. The law grants the Central Bank of Iraq broad supervisory powers over all licensed banks and financial institutions, including the authority to issue binding instructions on lending practices, capital requirements, and risk management. Complementing Banking Law No. 94 is the Iraqi Civil Code, which governs the contractual aspects of loan agreements including formation, validity, performance, and default. Articles 695 to 707 of the Civil Code address loan contracts specifically, establishing rules on interest, repayment, and the rights of creditors upon default. The Companies Law No. 21 of 1997 (as amended) is also relevant for corporate borrowers, governing the authority of company directors and officers to enter into borrowing arrangements on behalf of their entities. Central Bank of Iraq — Regulatory Instructions The CBI exercises its supervisory mandate through a series of binding instructions issued to licensed banks. Key CBI regulatory requirements affecting lending include: credit concentration limits restricting the maximum exposure a bank may have to a single borrower or group of connected borrowers, typically set at a percentage of the bank’s capital base; loan classification and provisioning instructions requiring banks to categorise their loan portfolios into performing, substandard, doubtful, and loss categories, with corresponding provisioning requirements; collateral valuation instructions governing the types of collateral acceptable for secured lending and the methodology for valuing such collateral; and lending to related parties restrictions imposing strict limits on banks’ ability to extend credit to their own shareholders, directors, and affiliates. The CBI also requires banks to establish formal credit policies approved by their boards of directors, covering underwriting standards, credit approval authorities, and portfolio concentration limits. Capital Adequacy — Basel III in the Iraqi Context The CBI has committed to implementing Basel III capital adequacy standards, bringing Iraqi banking regulation into alignment with international prudential norms. Under Basel III as adopted by the CBI, Iraqi banks are required to maintain: a minimum Common Equity Tier 1 (CET1) ratio, a Tier 1 capital ratio, and a total capital ratio calculated against risk-weighted assets. The capital conservation buffer and countercyclical capital buffer requirements are also being phased in. For borrowers, Basel III has a direct practical impact: higher capital requirements mean banks face greater constraints on their lending capacity, particularly for higher-risk credit exposures. Understanding how your lending transaction will be risk-weighted under the CBI’s Basel III framework affects both your ability to obtain financing and its pricing. Relevant Iraqi Regulatory Bodies The CBI has committed to implementing Basel III capital adequacy standards, bringing Iraqi banking regulation into alignment with international prudential norms. Under Basel III as adopted by the CBI, Iraqi banks are required to maintain: a minimum Common Equity Tier 1 (CET1) ratio, a Tier 1 capital ratio, and a total capital ratio calculated against risk-weighted assets. The capital conservation buffer and countercyclical capital buffer requirements are also being phased in. For borrowers, Basel III has a direct practical impact: higher capital requirements mean banks face greater constraints on their lending capacity, particularly for higher-risk credit exposures. Understanding how your lending transaction will be risk-weighted under the CBI’s Basel III framework affects both your ability to obtain financing and its pricing. Relevant Iraqi Regulatory Bodies Several Iraqi authorities play roles in the lending environment. The Central Bank of Iraq is the primary prudential regulator of all licensed banks and has authority to issue, amend, and enforce lending regulations. The Anti-Money Laundering and Countering Financing of Terrorism Office (AMLCFT Office) oversees compliance with AML Law No. 39 of 2015 as it applies to lending transactions particularly the requirement to conduct customer due diligence on borrowers. The Companies Registry Directorate is relevant for verifying the legal status and authorised signatories of corporate borrowers. The Board of Supreme Audit has oversight over lending by state-owned banks. For lending in the Kurdistan Region, the relevant regulatory authority coordinates with the CBI but has certain additional local requirements. Key Compliance Requirements for Iraqi Banks Iraqi banks extending credit must satisfy the following core compliance requirements: conducting thorough credit assessment of borrowers including financial analysis, purpose of credit, and repayment capacity; registering any security interests over movable property through the available registration systems; complying with AML customer due diligence obligations including verification of the borrower’s identity, beneficial ownership, and source of funds; obtaining CBI approval for certain categories of large exposures or related-party transactions; maintaining loan files with complete documentation including credit applications, financial statements, approval memoranda, and executed agreements; and reporting non-performing loans to the CBI within specified timeframes. International Standards — What Iraqi Banks Are Expected to Meet Beyond CBI requirements, Iraqi banks seeking correspondent banking relationships and participation in international financing transactions are expected to demonstrate alignment with: the FATF 40 Recommendations on AML and CFT critical given Iraq’s status on the FATF monitoring list; the Wolfsberg Group Principles on correspondent banking and financial crime compliance; Loan Market Association (LMA) documentation standards for any participation in syndicated transactions with international banks; and IFRS 9 financial instrument accounting standards for loan classification and expected credit loss provisioning. Foreign banks extending credit in Iraq or to Iraqi borrowers will typically require compliance with their own home jurisdiction standards as well as Iraqi law. Practical Implications for Borrowers Corporate borrowers in Iraq should understand that the regulatory

Financing – Sovereign Guarantee

Financing – Sovereign Guarantee Etihad Law Firm is proud to be actively involved in supporting national efforts aimed at enhancing the confidence of international financial institutions in Iraq to enabling the industrial and investment sectors to access sustainable foreign #financing sources that meet economic development aspirations. The firm played a key role in preparing and drafting legal documents and commitments that govern the relationship between the Trade Bank of Iraq (TBI), Export Credit Agencies #ECAs, foreign banks, and international investors. This ensures clarity of obligations and integration of legal and financing frameworks in accordance with international standards. The firm’s team also cooperated with specialized international law firms to prepare contractual structures and provide the necessary legal advice to meet financing requirements, facilitating negotiations and coordination between all relevant parties, including industrial projects with a direct economic impact in Iraq. We are pleased to congratulate our #investor_clients who received yesterday’s Cabinet decision approving a #sovereign_guarantee. These are the first three Iraqi private sector projects to be financed in this manner, in cooperation with the #UK_Export_Credit_Agency #UKEF, Standard Chartered Bank. This achievement marks a significant turning point in the path of #Iraqi private sector #financing. Etihad expresses its high appreciation for the fruitful cooperation and significant facilitation provided by the Iraqi government, represented by the #Council_of_Ministers, the Ministry of Finance, and the Trade Bank of Iraq, in supporting this pioneering national effort. Etihad affirms its continued commitment to continuing to support national projects and foreign investments by providing comprehensive legal solutions that enhance the confidence of international partners in the Iraqi economy and contribute to achieving sustainable development.

Sovereign Guarantee

Sovereign Guarantee Etihad Law Firm is pleased to announce the release of its latest publication: “#Sovereign_Guarantee Guide in #Iraq”. This comprehensive guide offers an in-depth overview of the sovereign guarantee mechanism and its pivotal role in stimulating #investment and supporting major #projects in a rapidly evolving market. Prepared by Mr. Ahmed Al Hankawi and Ms. Shayma Azeez Hatem; the guide presents a clear and concise summary of the essential information, enriched with legal insights and practical perspectives. Amid Iraq’s ongoing economic transformation, in light of government led initiatives and regulatory reforms aimed at attracting foreign capital; the sovereign guarantee emerges as a key instrument for enhancing investor confidence and #mitigating risk. It opens up promising opportunities across sectors such as #infrastructure, #industry, #agriculture, and more. This guide serves as a valuable reference for investors and decision makers seeking to understand the legal and institutional framework of sovereign guarantees in Iraq and to explore the vast potential offered by the country’s dynamic economic landscape.